Monthly checks from rental or other income are a perk of real estate investing that is trumped only by the final payout after selling the asset. Therefore, approach the transfer of ownership of an apartment building with care and preparation to earn the best possible return on the investment. Here’s everything you need to know about how to sell an apartment building successfully.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
Optimize the Capitalization Rate & Organize Financial Records
The most crucial step for a successful termination of a multifamily asset starts months, if not years in advance: improving the capitalization rate. As the seller, you want to lower the cap rate to increase the market value.
Improving the cap rate entails increasing the net operating income, and it may be part of the original business plan. But fine-tuning the cap rate is as essential as cleaning up a credit score to a residential home buyer: it puts the property in the best position it can be in when it goes on the market.
Cap rates demonstrate the income potential at a glance, and it is particularly beneficial for buyers comparing multiple properties. The cap rate gives buyers insight into the profit compared to the building’s price, better allowing them to assess two like properties.
Ideally, owners will have a long-term plan for putting an apartment building on the market. This gives them time to strategically improve the cap rate in the years leading up to the sale. Unfortunately, last-minute changes to finances will not have the same impact as sustained income or expense patterns.
Expect that any buyer and their lender will want to review the apartment building’s financial profit and loss statements as well. They are looking for upward-trending rents and expenses that are holding steady or declining. Not only do well-kept financial records offer a vote of confidence in favor of the building’s business viability, but they will make the entire transaction proceed more smoothly.
Tips for Compressing the Cap Rate
Compressing the cap rate can require some creativity, and most importantly, time. In the years leading up to selling the property, implementing cost-saving and revenue-increasing strategies will not only increase the monthly income but create positively trending financials in a way that makes the property an easy sell. Here are a few ideas:
- Implement or replace property management
- Bill utilities back to tenants
- Restructure low-demand units to higher-demand footprints
- Improve building energy efficiency
- Increase rents through improved amenities
Spruce Up the Appearance
After getting the finances of the building in ideal condition, the next best way to attract and keep buyers will be to make the building’s appearance equally appealing. If you made some renovations during the first few years of ownership, ensure they haven’t visually aged and reduced the value you created.
Aesthetic improvements for basic things like paint and landscape repair can add up quickly, so owners must always carefully weigh the potential return on cost. Most buyers want to see a profitable, maintained building. However, in some markets, buyers are increasingly accepting multifamily assets in ‘as-is’ condition. Knowing your area will help you balance the effort and expense against potential profit.
Confirm Title is Clear
Before putting the building on the market, ensure that the title is marketable and clear. Apartment buildings undergo vast amounts of work from several contractors—and an overlooked invoice can lead to a contractor’s lien, also known as a mechanic’s lien or construction lien.
Sometimes the clouds on the title are as simple as a clerical error in recording documents. Many are relatively simple but time-consuming to resolve, and they can derail the buyer’s financing.
Determine Value
After cutting expenses, increasing revenue, and improving the curb appeal of the apartment building, it is the perfect time to determine the value of the property. If desired, you can get a preemptive certified appraisal for the most detailed price recommendation available.
Sellers can request an official opinion of value from their licensed real estate broker. When shopping for a new broker, take advantage of the expertise of a few of the top brokers on your shortlist by requesting official opinions of value from each of them. Use their additional viewpoints to fine-tune the property before listing it.
Choose a Reliable Buyer
Unfortunately, entering into a contract to sell an apartment building is rarely as simple as just choosing the highest and best offer. The purchase process offers many opportunities for an inexperienced or underfunded buyer to back out, ultimately costing the seller time and money.
When selecting an offer, consider the investor’s experience. Those with a track record of successful transactions demonstrate an ability to secure financing and may be less likely to back out as they learn more about the building.
Conclusion
Selling an apartment building is the last hurdle before the real estate investor gets to reap the fruits of their labor. With preparation of the building and attention to the cap rate, the investor can maximize their harvest.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
